Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete
AbstractFree trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile - ex post, and markets for contingent claims are incomplete. The government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets. Using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti-trade bias. We also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0797.
Date of creation: Nov 1981
Date of revision:
Publication status: published as Eaton, Jonathan and Gene M. Grossman. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets are Incomplete." Canadian Journal of Economics, Vol. 18, No. 2, (May 1985), pp. 258-272.
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- Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 18(2), pages 258-72, May.
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- Flemming, John S & Turnovsky, Stephen J & Kemp, Murray C, 1977. "On the Choice of Numeraire and Certainty Price in General Equilibrium Models of Price Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 573-83, October.
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- Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(398), pages 1065-82, December.
- Eaton, Jonathan & Rosen, Harvey S, 1980. "Optimal Redistributive Taxation and Uncertainty," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 95(2), pages 357-64, September.
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